ROUND TABLE ON THE FUTURE OF THE MONETARY SYSTEM: POLITICAL PRECONDITIONS FORA NEW INTERNATIONAL MONETARY SYSTEM REMARKS BY GERASSIMOS D. ARSENIS SZIRAK, HUNGARY AUGUST 28-29 1986

I must confess that I have had some difficulty in making up my mind on what to say at this Conference. More by accident then by design, I have invested a good part of my professional life international monetary issues. First, as a young researcher, in the sixties, I was exposed to the marvels of the Bretton Woods System and I was shocked at the inability of politicians to act before the gathering storm, the nature of which was clearly explained by the academics. Surely, I thought, it was a matter of educating the politicians. Later on, in the seventies, I found myself in the midst of the activities for the reform of the International Monetary System, writing and speaking from the standpoint of the United Nations. I lived the excitement of efforts for creation and the disappointment from the failure to succeed. I certainly could not say that the political figures who took part in the negotiations needed education from professional economists. The reports of the Committee of Twenty clearly indicated that the members were fully aware of all technical aspects of the issue. Thus, we attributed the failure to act upon the conclusions of the Committee of Twenty to lack of political will which, to my own mind, meant that each nation assumed that it would be better off if it was left to act on its own within the rather loose framework of the flexible non-system that emerged. Subsequently, I have had the fortune to experience the impact of that system from the standpoint of a single country, first as a Central Banker and then as Minister for the Economy and Finance. It was then that I realised who really determines the money supply and who really shapes the parameters which in turn determine investment plans and trade direction. The problem was not that currencies floated; real variables move on the roller-coaster as well. Without wishing to attribute the sinking of national economies to managed floating of key currencies, I feel that I am fair when I say that sustained growth cannot be obtained unless we reform the International Monetary System.

While I have made a full circle, I feel that there is very little new that I can say. I find the field well covered and the issues quite well understood. Our inability to move ahead is political in its nature and I believe that if we want to contribute towards a breakthrough we must re-examine the issues in political terms. We must remember that a new International Monetary System will have to be agreed upon and implemented by politicians who have their own scale for weighting things. Therefore, it seems to me most important to see the matter in this light.

Now, our typical homo politicus is not going to risk much in the adventure, nor is he going to initiate, together with others, a process of reform even when he feels that it is indeed required. Bankers and Ministers of Finance move in herds. They are capable collectively to manage a system but they cannot replace one by another. They attend meetings for reforms, etc not out of a belief that something new should emerge but out of fear that something might happen in their absence. As in national politics so in international affairs real change happens only when a political leader (a statesman who has little in common with our typical homo politicus) sees the need for change and can influence the course of events. Then, the herd can be put to work. It will work well if there exists a broad correspondence between its perceived needs and the norms of the reform and if the mechanism itself inspires confidence that rules would be enforced.

I do not wish to dwell upon the difficult issue of political leadership and the reasons why we do not experience it to-day. I only want to stress that if and when a political breakthrough occurs, the success of the initiative will depend to a large extend upon how the political machinery will move along. In this context, I see a fruitful area for the economists to explore, namely:

Firstly, to ensure that there is convergence between the real issues underlying the reform and the needs as perceived by members of political committees and secondly, to work out a credible program of transition that will move as from here to there.

Let me try to illustrate what I mean. If we ask our homo politicus to give us his own views on the issue of International Monetary Reform, most likely he will sum up as follows:

First, the exceptional historical forces that underpinned the Bretton Woods System do not operate today and are not likely to repeat themselves in the future. Thus, efforts to return to the old system will prove futile.

Second, free movement of capital is incompatible with a system of fixed exchange rates which are changed occasionally and in a manner that the market can anticipate. Since capital movements are not likely to be controlled – for a number of political and technical issues – exchange rates will remain unstable.

Third, exchange rates are unduly influenced by short-term capital movements. Thus, the prevailing practices in regard to exchange rate policy have not insulated domestic economies from external influences but more often than not have resulted in undesirable changes in real exchange rates which could not be dealt with effectively by the usual instruments of national economic policy.

Fourth, with all its shortcomings, the present non-system has some positive features. In the recent past, for example, it has succeeded in financing large balance of payments deficits in a manner that official mechanisms would not have done. On the other hand, the instability that the prevailing regime has introduced has made it very difficult, if not impossible, to carry out a viable program of structural adjustment. Moreover, there exists no effective mechanism for dealing with the accumulated debts of developing countries which threaten the viability of international economic relations.

Fifth, conceptually, there are alternative systems that could prove more effective than the present situation. For example, the System that was proposed by the Committee of Twenty, twelve years ago, contains features that are relevant and desirable. On the other hand, it is most unlikely that there can be consensus to implement such a System today. Different countries have problems with different elements of the package.

Some of us may sum up their own understanding somewhat differently but we cannot have a major quarrel with the above. Yet, if we accept it as a basis of discussions, all we can do is to think about this or that gimmick which, at the margin, may change a bit the state of affairs without altering the character of the situation. To avoid that trap we must reject the preposition that the problems as perceived in the above summing up touch upon the real problem which lies at the root of the disaccord.

I have found that an effective way of clarifying the issue is to consider what would happen if the perceived problem ceases to exist. So, let us assume that there exists a World Bank of Issue, which issues the single world currency. It acts like a Central Bank and manages world liquidity so as to stabilize the macroeconomic environment. For this purpose, it is engaged in open market operations as well as rediscount operations. Securities of national governments are purchased in open market operations in proportion to the voting weight of each country (perhaps on the basis of GNP shares or other agreed upon indices).

Now, ask the homo politicus how he would react in such a world where there is no exchange rate problem and the adjustment is instantaneous. We will be surprised to find out that when confronted with this fait accomplit, he would have few remarks to make about the Monetary System itself but he would have a lot of problems in other areas. Surely, he will first ask how seigniorage would be distributed but receiving the answer that it would be distributed to national governments as their securities are purchased by the Bank of Issue and where profits from interest earnings are distributed to the shareholders, he will have little to say by way of objection. He will be quick to realize that, in reality, he is giving up little, if any, sovereignty since he has had limited control over the money supply and in any event the relative weights to be given by the Board of the Bank of Issue to production and employment as compared to price stability are not likely to be very different from those used by the Board of his Central Bank. Clearly, his problem is not with the monetary dimension of International Cooperation. The international monetary problem has been the veil which hides the main issue and in which our homo politicus has a f i r m attachment, namely the management of resources. That is why his questions will center around the working of capital markets. What he is really interested in knowing is whether the new International Monetary System will enable him to pursue the goals of fiscal policy with independence. More specifically, he will as whether the functioning of the capital markets would be such so as to enable him to finance his government deficit or (alternatively) to channel profitably national saving surplus to international investment. Finally, he would insist on knowing what kind of regional development policy would accompany this new Global Monetary System.

The upshot of all this is that there can be no real progress on monetary issues until there is some breakthrough in the area of global management of resources. It follows, therefore, that monetary issues should be discussed in the context of national policies relating to employment, output, investment and development. A side-effect of this approach would be that the constituency of monetary reform will be broadened with the involvement of those forces that deal with the question of resource management. And I dare say that this development may enhance the possibility of convering our views on a first program of action.

Now, to help put the question of monetary reform in the right focus is one thing. To get the process of reform moving is another. As I said earlier, there is no credible political leadership to pull us in the direction of fully-fledged reform. We must therefore satisfy ourselves with changes that come about under the force of events. Our own task would be to harness those forces of change and make them building stones of a global economic system for the next century. In this context, it is very important to select those issues that are relevant to the long-term reform and offer some chances of convergence of views. My own view is that we will make a significant contribution towards reform if we could concentrate our work on two relevant and topical issues:

First, co-ordination of policies, including monetary policies, among countries which exhibit an advanced degree of homogeneity with regard to attitudes on price stability and employment.

Second, promotion of mechanisms to deal with the debt problems of developing countries in a development context.

I propose the first topic of concentration because I believe that global conditions for reform must be built-up from selected but key sub-groupings. The second issue, whether we like it or not is with us. The way we will deal with the issue will determine to a considerable extent whether we move closer to or away from a Global System of Economic Cooperation.